Synthetic Lending Rates Predict Subsequent Market Return

Abstract

The paper studies the relationship between synthetic lending rates derived from the options market and subsequent market performance. The research examines Cboe Hanweck Borrow Intensity Indicators, defined as the risk-free rate minus the lending fee. According to the results, the rise (fall) in aggregate borrow intensity computed as the average borrow intensity for more than 4000 assets predicts positive (negative) next day's market return proxied by the SPY ETF. The effect is statistically and economically significant but is quickly reversed over the next two days. Additionally, the effect is much more substantial during crisis periods in the sample: the crash of December 2018 and the beginning of the coronavirus pandemic (February - April 2020). The two crises are the main reasons the market timing strategies outperform the SPY benchmark during the sample period. Overall, the results show crucial implications of changes in borrow intensities and lending fees during crises.

Keywords: lending rates, borrow intensity, shorting, shorting costs, SPY, crisis